Must-Reads of 2017: How Finance Ate Everything

(Bloomberg View) -- Three decades ago, a revolution occurred in the world economy. Today, we’re living through its extensive political consequences. This revolution consisted of financialization. Financial services, from banks and hedge funds to trading houses, became the largest industry in the U.S. Market speculation replaced industrial productivity as the motor of U.S. growth, while mobile capital was steadily liberated from tax and regulatory regimes around the world.

The impact of this revolution has been incalculable. Accompanied by the rapid enrichment of a few and stagnation and disappointment for many more, it’s destabilized political life on all continents, empowering, among others, volatile demagogues such as Donald Trump.

Back in the 19th century, another economic revolution, one based on industrial modes of production, also launched a new phase in human history. Bringing the masses into politics, the industrial revolution turned inequality into an urgent issue and made socialism an appealing idea and imperial expansion a necessity. It speeded up history like nothing had before.

We’ve had more than a century to digest the consequences of that shift and to learn to mitigate the worst of them. However, the move from industrial to post-industrial society, or from making and selling things to making money out of money, is still poorly understood. As three recent books make clear, it involves an equally radical transformation of our political and economic landscape.

Joseph Vogl’s “The Ascendancy of Finance” sketches how, since the 1980s, the global market has come to exercise greater sovereignty than the political institutions of the nation-state. His thesis is both compelling and lucid: “Modern finance,” he writes, “represents a concentration of decision-making power that acts in parallel to national sovereignty, bypassing democratic procedures.” This has opened up a political void in which a significant number of citizens feel unrepresented, left behind and even pushed behind.

Much of this structural imbalance of power, and the politically explosive consequences of de-industralization, remained unnoticed since the U.S. economy grew rapidly throughout most of the 1990s, even as many economies in East Asia and Russia slackened or experienced severe crises. Moreover, Wall Street had unchallenged access to global savings and the dollar was the world’s reserve currency. General expectations of prosperity among the restless masses could be met by a seductive array of credit offers.

But the reckoning had to come, and so it did in 2008. Vogl, a German scholar, makes his most useful contribution by explaining why governments failed to fix a clearly broken system, protect its weakest victims or preempt the angry revolt that we witness today. 

The global market which came to determine the fate of currencies, social systems, public infrastructure and private savings had usurped the traditional authority of governments. Political representatives, who had been complicit in this process of ceding their own power, were unable to respond effectively. Consequently, an acute and pervasive sense of powerlessness makes many citizens vulnerable to a strongman promising to sort out a complex mess.

In an updated edition of “Makers and Takers: How Wall Street Destroyed Main Street,” Rana Foroohar argues convincingly that Trump’s success lay in exploiting the devastating failure of Wall Street to make space for Main Street. Financiers pursuing short-term profits prioritized debt-fueled speculation over lending to and investing in businesses.

Even after the Great Recession, mobile capital continued to concentrate wealth in the hands of a transnational minority -- which, as the post-2008 taxpayer-funded bailouts proved, did not cease to offload its risks on unsuspecting citizens. Much of the success of demagogues such as Trump lies in this minority's ability to redirect public anger onto trade and immigration, while dodging blame for the consequences of financialization.

Public anger, though woefully misdirected, is grounded in genuine inequities. Sheelah Kolhatkar’s “Black Edge: Inside Information, Dirty Money and the Quest to Bring Down the Most Wanted Man on Wall Street” focuses on one member of the financial elite -- Steven A. Cohen of notorious SAC Capital Advisors LP, who made his billions and acquired one of the world’s largest art collections through placing bets in the financial markets. A natural storyteller and diligent investigator, Kolhatkar shows how easily a small group of billionaire financiers could disregard democratic if not legal procedures.

Their gambling with other people's money is hardly unusual, however. We have lived for more than three decades in a world where welfare, pensions, savings, healthcare and education are connected to the risks of the financial system, turning millions of ordinary Americans into players in the market. Many modes of financial capitalism are now entrenched.

At the same time, as Foroohar points out, "America's ability to offer up even the appearance of growth" through financialization "is at an end." The financial revolution has no solution for stagnant wages, income inequality and job insecurity. And there is no easy way to transition out of it, either, especially as demagogues do what they are best at: find scapegoats instead of solutions.     

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Pankaj Mishra is a Bloomberg View columnist. His books include “From the Ruins of Empire: The Intellectuals Who Remade Asia,” “Temptations of the West: How to Be Modern in India, Pakistan, Tibet and Beyond” and “An End to Suffering: The Buddha in the World.”

To contact the author of this story: Pankaj Mishra at pmishra24@bloomberg.net.

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